The beleaguered Congress-Nationalist Congress Party (NCP) government in Maharashtra, which faced a strong opposition from traders during general elections, has proposed to introduce a new tax to abolish the controversial local body tax (LBT) in 26 municipal corporations, excluding Brihan Mumbai Municipal Corporation. According to the proposal drafted by the finance and sales tax departments, the tax will be part of the VAT (value-added tax) Act after some modification.

The new tax, which will be a form of purchase tax, will be linked to the five VAT schedules, namely zeo per cent , one per cent, five per cent, 12.5 per cent and 25 per cent and will be in small percentage. The government proposed to keep a uniform rate as demanded by traders. The tax, which was discussed with the traders just four days ago, will likely be imposed from November 1.

Chief Minister Prithviraj Chavan last week announced that the government was in the process of bringing out an alternate tax to repeal LBT.

NCP has been quite aggressive in pressing for abolition of LBT in the run-up to the assembly election, while the Bharatiya Janata Party had threatened to launch agitations opposing the same.

LBT was introduced in Maharashtra in 2010 in a phased manner beginning with tier-III cities by scrapping the octroi duty (tax levied on the entry of goods into municipal limits of Maharashtra by the municipal corporations of the state since 1965). In 2013, LBT was also applied to tier-I and tier-II cities, except Mumbai.

The government had proposed returning to octroi or introducing a three per cent surcharge on VAT. These proposals, however, were opposed by the traders.

A senior official told Business Standard: “Under the new tax regime a separate challan will have to be paid for its payment in VAT department. The same tax will be transferred to the respective municipal corporation automatically. Hence, the autonomy of the municipal corporation is here to stay as is their revenues. The exempted categories in VAT such as sugar, textiles and food grains will not attract the new tax.”

Only companies in the municipal corporation area and those registered with VAT department would pay the new tax, added the official.

“The exemption will be according to VAT rules, where the turnover is up to Rs 10 lakh. Besides, penalty and interest will be also be according to VAT Act. Separate annexure for purchase returns will be filed with VAT returns,” the official said. However, various bodies representing the trading community have opposed the new tax proposal. They said the government was again getting into one more format for assessment that was not acceptable.